FASTEN YOUR SEAT BELTS, BUMPY ROAD AHEAD!

 

                Roads are the most important modal transport in Brazil.  They respond for almost 70% of total freight in the country, but only 12% of the road network is paved.

                The low quality of the highways contributes for higher logistics costs (8,7% of GDP in the USA versus 11,5% of GDP in Brazil) and economic losses due to delays and traffic accidents, those estimated in more than 1% of GDP. 

                After 1995, with 8.987 Law, Brazil accelerated PPPs, granting road concessions.  Since then, and after three rounds, 15% of federal roads were concessioned, totaling more than ten thousand kilometers.

 1st Round  

High tariffs

Low quality contracts

2nd Round

Low tariffs Lack of investment Low quality contracts

3rd Round 

Low tariffs Contracts improvements No central planning

                 Despite the tariff mess around the country – you can go from a very cheap stretch to another very expensive one in the blink of an eye – and the concession of a lot of stretches with no integrated planning, this model clearly improved Brazilian highways quality.  A recent survey revealed that 74% of the private roads are graded as “good” or “very good”, against only 30% of state managed highways.

                But there is still much to do and PPPs can do much.  Brazilian needs of infrastructure are huge and under the current fiscal deterioration scenario, Government just launched an R$198 billion logistics concession plan, with investments in railways, airports, ports and roads, trying to attract the private sector and improve productivity and competitiveness.

                Only in roads R$ 66 billion of investments are expected.  Four stretches are close to have their feasibility studies finished.  And eleven others will be authorized to private sector to start the studies.

                But…

                The previous logistics concession plan launched in 2012 reached only 25% of achievement, for a lot of reasons. Funding was not a problem at that time.  But planning and feasibility studies were.

Airports and roads - which had feasibility studies done by independent advisors, like EBP and IFC - were successful, but railways didn´t, neither ports, which studies stuck in the Public Auditors Court.

Let´s focus on development of highways PPPs:

PPP FRAMEWORK

The number of Km under PPPs in Brazil, a continental country, is very impressive.  Only at the third round more than 5,000 Km were concessioned. 

Even without a central planning and far from cost benefit analysis, like Value for Money, the stretches offered to private sector followed a good sense, mostly located in Midwest region, an important route to agribusiness.

At that round Brazil Central Government authorized independent consultants to do the studies before lauching public auctions, under 8.987 Law.   After an arm wrestling over investments return rate, where the Government retreated, there was strong competition and winner bids presented 50% of discount in tariffs, on average.

These contracts showed great improvements from the previous round, which stretches faced problems regarding lack of investments and poor enforcement.  On the third round adequate performance indicators and enforcement were set.

ATTRACTING THE RIGHT PARTNER

Brazilian constructors were the main winners of the third round.  Under suspicions of corruption after “Lava-Jato” Federal Police operation, some companies are facing problems and probably will have to sell assets to survive.

It brings an opportunity to more experienced players in the secondary market and doesn´t seem to be a problem, since projects are brownfield and economically viable.

But it shows the importance of having a fair and transparent process, with independent studies, adequate risk allocation and solid contracts.

IMPLEMENTING PPPs

Recently one important bridge in Rio de Janeiro had its concession contract terminated.  Government held a competitive process and another player bid won the auction for running the PPP for the next 30 years.

It was a tough process, conducted within the former concessionaire.  Regulator didn´t have enforcement mechanisms due to a poor contract. 

The key performance indicators designed on the third round and other mechanisms where applied in the new contract signed, trying to avoid this situation next time. 

The contract management of this bridge and the other stretches already under PPPs will reveal the stability of those contracts and show other improvements that could be done.

 

CONCLUSIONS AND RECOMMENDATIONS

                A big country like Brazil cannot forget the necessity of planning its highway network in a long term basis. Much was done, but we need a shift in the whole process to go further.

                Even being in a right path of stablishing Public Private Partnerships, we should concern about recent trends, like Government allowing the private sector to do studies where they are interested in, in a process close to unsolicited proposals.

                It can put some improvements made over the last years in risk, since we could no longer ensure transparency and independence when procuring new PPPs.

There´s no free lunch, let´s do the homework.